E4 Cost of capital and capital structure

Written by Saad Rahman (ACCA)

ACCA · New at Expertise level · 8 questions

Name: ____________________ Date: ____________

Retention of 40 percent at a return of 15 percent gives what dividend growth rate?
- A 40%
- B 55%
- C 15%
- D 6%
The next dividend is $0.30, the price is $5.00 and growth is 6 percent. What is the cost of equity using the dividend growth model?
- A 11%
- B 12%
- C 6%
- D 18%
Which risk is removed by holding a diversified portfolio?
- A Interest rate risk
- B Systematic risk
- C Market risk
- D Unsystematic risk
According to CAPM, investors are rewarded for:
- A Unsystematic risk
- B Total risk
- C No risk
- D Systematic risk
Preference shares pay a dividend of $6 and trade at $75. What is the cost?
- A 6%
- B 75%
- C 8%
- D 12.5%
When can WACC be used as the discount rate for a project?
- A When the project has the same business risk and does not change the company's financial risk
- B Never
- C Always
- D Only for small projects
According to pecking order theory, what is the first choice of finance?
- A Retained earnings
- B New equity
- C Debt
- D Preference shares
According to Modigliani and Miller with tax, value rises with gearing because of:
- A Lower risk
- B Lower costs
- C The tax shield on interest
- D Higher dividends

Answer key

1. D, 2. B, 3. D, 4. D, 5. C, 6. A, 7. A, 8. C